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Raghuram Rajan - The ideal boy rides yet again

Source : BUSINESS_STANDARD
Last Updated: Thu, Sep 19, 2013 20:51 hrs
​Raghuram Rajan

The enthusiasm with which markets reacted to the new Reserve Bank of India (RBI) governor's enthusiastic first day at the office made me realise that the Indian economy is entering a new phase - Raghuram Rajya, to coin a cute term. Wikipedia and my kids explained to me that the historic/mythological term, Ram Rajya, far from connoting any Hindu ascendancy (as has been often pushed recently), was, to quote Mahatma Gandhi, "undoubtedly one of true democracy … [that] ensures equal rights alike of prince and pauper".



As in the Ramayana, it reflected a belief in an ideal cast of characters - the ideal father, the ideal brother, the ideal wife (all subsumed, in contemporary life, into the ideal citizen), the ideal king and the ideal servant (in contemporary life, ideal elected representatives and ideal bureaucrats).

While the word "ideal" is curiously old-fashioned and, indeed, sometimes seems almost laughable in current usage, it actually reflects the only true reality of man. For many years of my life (the last few that I spent in New York), I was known as Ideal Boy, so I know what it means.

And now, we have another Ideal Boy at the head of the RBI.

Undaunted by what non-ideal mortals call pragmatic reality, he rolled up his sleeves on his first day in office and rolled out a series of measures that turned sentiment, as if on a dime. While the rupee was already recovering under the ministrations of the previous administration, his bold steps to accelerate inflows (giving banks a straight-ahead incentive to borrow overseas) and to restart deregulation appear to have definitively built a floor under the currency.

The stock market, too, is confusedly delighted - it is worth noting that even through the dog days of July, there was no meaningful flight by foreign institutional investors (FIIs) from equities. On reflection, this makes sense. Exiting from equity investments today - at Rs 65 to the dollar - would deliver excruciatingly painful dollar returns; better to wait it out. In fact, the "stickiness" of FII equity investment confirms that global investors share the view that the recent rupee blow-out was overdone. If they genuinely believed the India story was over and that the rupee would continue to depreciate, they would have been long gone.

Indeed, sentiment was already turning before Dr Rajan took his ideal seat. A few days later, a financial paper front-paged a survey showing that the majority of Indian CEOs believed the worst was over and were looking for close to six per cent growth next year. One of the largest business groups has just invested Rs 4,000 crore in a domestic acquisition; multiple infrastructure projects have been cleared (yes, yes, I know clearance is only the starting point); the index of industrial production (IIP) is up, and so on. Even the art market, which is a leading indicator of sentiment, seems to be coming good after five lean years.

I guess everybody - not counting a few permanent sourpusses and politically vested interests - was ready for an uptick: you can stay depressed for only so long.

Now that it is turning, each of us has to work consciously at keeping sentiment positive. It won't be easy - over the past couple of years, we have soaked so long in the India-is-in-a-mess bathtub that it is difficult to just rinse it off. And, to be sure, India is in a mess. But we are more likely to be able to fix the mess if we go at it with a positive frame of mind.

So, c'mon, look beyond the increasing volume of political hoo-hah and possible global events that can - and doubtless will - keep markets off balance. There are plenty of positives.

The first is that even our politicians are beginning to - or being forced to - listen. The government's attempt to turn back the Supreme Court's order disqualifying legislators with criminal records failed, and Parliament did not push through legislation to exempt political parties from the RTI (granted, it is still in the standing committee). We need to keep the pressure on.

Another positive is our ideal governor. Chances are he will continue to reiterate the need to contain inflation but my sense is the market will buy this, at least right now. While we need growth, we need to ensure that the problem of current account deficit is sustainably resolved more. Positive real interest rates are necessary steps, and, in any case, stronger sentiment is a more effective driving force for growth than marginally lower interest rates. The good news is that the governor does have some room on interest rates; certainly the marginal standing facility can come down by one per cent, but, hey, he's the Ideal Boy - let him take the call.

Only one suggestion while he's settling in - organise a salsa party at the governor's bungalow. Dr Subbarao and I would be glad to instruct.

jamal@mecklai.com

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